A SECOND TERM FOR MR. BERNANKE ? / THE NEW YORK TIMES EDITORIAL ( RECOMMENDED READING )

August 26, 2009

Editorial

A Second Term for Mr. Bernanke?

Projecting an air of casual inevitability, President Obama took a break from his summer vacation on Tuesday to nominate Ben Bernanke to a second term as chairman of the Federal Reserve.

Mr. Obama said that Mr. Bernanke’s leadership in the financial crisis had helped to prevent another Great Depression. He praised Mr. Bernanke as a man whose qualities and capabilities had helped to “put the brakes on our economic free fall.” All true, as far as it goes. But it does not go far enough.

As chairman of the Fed since 2006, Mr. Bernanke also helped foment the crisis he is now charged with managing. Like his predecessor, Alan Greenspan, he did not meet his obligation to police the reckless lending that was proliferating across the economy. Instead, like Mr. Greenspan, he seemed to view debt-fueled growth and speculative fervor as issues best dealt with after — but not before — the bursting of a bubble.

But when the implosion came, after the collapse of Lehman Brothers last fall, conventional ways of coping were to no avail. The result has been trillions of dollars in government expenditures, loans, debt guarantees and other taxpayer commitments to keep the financial system and the broader economy afloat. Another Great Depression was avoided, but the Great Recession could have been eased, and perhaps even avoided, if officials like Mr. Bernanke had taken precautionary action.

Nor is there any assurance that the continuing rescues will result in a stable, prosperous economy. So far, they have strengthened the survivors on Wall Street and replaced demand that is still lacking from consumers and investors. But signs are scant that the economy can function on its own. In addition, the rescues themselves have implanted other risks — of fiscal crisis, of inflation and of endemic moral hazard, in which rescued institutions revert to reckless risk taking, secure in the knowledge that they will be bailed out if need be.

Crisis management has been Mr. Bernanke’s strong suit, but he did not distinguish himself before the crisis, and it is unknown how the actions he has undertaken in the short run will perform in the long run.

Mr. Obama has shown confidence in Mr. Bernanke and stressed the need for continuity in Fed leadership in a fragile economic time. But senators will do the nation a disservice if they treat the renomination as a mere formality. Mr. Bernanke’s confirmation hearing should be used to air and weigh his merits and shortcomings. Mr. Bernanke should address them forthrightly as well.

Copyright 2009 The New York Times Company